Is Fiat-Chrysler's Jeep Worth $120 Billion? Massive International Expansion Plan Underway

| About: Fiat Chrysler (FCAU)


Jeep has an eight-step plan to double sales from 1.4 million units per year, to 3.0 million.

It’s based on the theory that people outside North America will come to like Jeep almost as much as Americans do. Can you spell “Cola-Cola?"

Jeep sells over 1 million per year in North America, so why not 1 million in Europe and 1 million in Asia too?

2016 sales results saw early signs of this sales expansion, with massive growth rates in Asia, Europe and other remote geographies.

A comparison with Tesla makes Jeep seem very strong: Over 45% growth outside US/Canada and Europe, plus healthy profitability.

Jeep celebrated its 75th anniversary in 2016. It's one of the most Iconic American brands, and now owned by Fiat-Chrysler Automobiles, or FCA (NYSE:FCAU) for short. It's almost as if the word "Jeep" has come to describe any terrain-worthy car that a civilian can buy.

Jeep also is one of the fastest-growing major auto brands with a significant U.S. presence. In 2016, among the companies in that category for which I have reliable global statistics, only Jaguar, Tesla (NASDAQ:TSLA) and Buick (NYSE:GM) grew faster. Jeep grew 13.2%.

Let's take a look at Jeep's global sales breakdown:

Jeep unit sales




% of total
















Rest of Europe















As you can see in the table above, Jeep's sales are heavily concentrated in the U.S. and indeed North America. The U.S. alone is over 66% of sales, and if you add Canada it's over 72%.

Yet, sales growth in U.S. and Canada is relatively modest for Jeep, averaging close to 6%, well under the brand's 13.2% global average. You can see it in the other geographies - Italy 35% growth, Rest of Europe over 10% growth, and a whopping almost 46% in the rest of the world.

The mismatch here is obvious. Jeep is seeing the most rapid sales growth in the places where it sells the fewest cars. Sales in U.S. plus Canada combined now exceed one million per year.

So here is the question: If Jeep can sell over one million cars in the U.S. and Canada in a year, why can't it also sell one million cars in Europe and another million cars in Asia?

As it turns out, it probably can. And it's got a plan.

Here is the plan.

It's an eight-step plan. To understand the first step of the plan, let's first look at the table above and wonder why Italy is growing so much faster than the rest of Europe, and alone constitutes over 38% of Jeep's sales in Europe overall. It's far from obvious to the untrained eye.

The reason is this: Starting two years ago, Jeep started making cars in Italy. The Jeep Renegade was co-developed with the Fiat 500x, and they are made on the same production line in Melfi, Italy. So for the Italians, the Jeep Renegade is a local product. And this extends in part to the rest of Europe, which is why Jeep's growth rates in Italy and Europe handily exceed that of the U.S. and Canada.

Step #2: A global platform

The Jeep Renegade and Fiat 500x set FCA on a path to launch a global platform. If you are going to manufacture and sell a car in high volume globally, it helps if you design it as such from scratch. This new platform is designed to carry at least seventeen (yes, 17) different engines, as the needs differ widely from North America to South America to China to India to Brazil to Europe to Russia and so forth. And as we shall see below, this new platform can support Jeeps of various sizes, smaller as well as larger.

Step #3: Industrializing in Brazil and China

Is your ambition to take Jeep sales to 3 million units per year? Well, then you have to build factories in Brazil and China, among other places. The Jeep Renegade, which was the first car on this new global Jeep platform, started production in 2015 in Brazil and China.

The result? Just look at the table above. Jeep sales outside U.S., Canada and Europe grew almost 46% in 2016. Remember, Tesla is valued at approximately $43 billion (assuming 168 million fully diluted shares in a future profitable quarter) for showing a 51% growth rate in 2016, reaching barely 76,000 cars sold.

In contrast, Jeep's "Asian/developing" market growth of 46% corresponded to almost 90,000 units - larger than all of Tesla's 2016 sales - and caused it to reach over 286,000 total unit sales in 2016 in those emerging geographies. Should this portion of Jeep's sales therefore be valued at just as much as Tesla, or perhaps 3x more given that it's over 3x as large? That valuation range would imply this sub-section of Jeep's sales between $40 billion and $120 billion. Remember, those geographies were only 20% of Jeep's overall global sales volume in 2016.

Step #4: Expand the lineup with a larger version of the Renegade

Starting in April, the all-new Jeep Compass will start arriving in U.S. dealerships. June will be the first month with "fully stocked" sales potential. What is this Jeep Compass?

The Compass inherits its name from a really crappy car that was long overdue for retirement. It also replaces the Patriot, equally overdue. Here is a combined U.S. sales chart for the outgoing Compass and Patriot:

US sales
















As you can see in the table above, these age-old cars managed to show very impressive U.S. sales increases in 2016 on a combined basis. In a flat market overall, these two cars were among the fastest growers. How come? Well, if you looked in your local newspaper, you would probably have found the Compass available starting at $9,999 and the Patriot for not much more than that. The cars were out-of-date, but they sold on price.

The all-new Compass is nothing like the old one, however, but rather it's basically a stretched Renegade, and it also adopts the styling from the much larger Grand Cherokee, which starts at $31,390 before the typical huge FCA retail discounts. And by huge, I mean that they can run well over 20% in many cases, sometimes over 30%. Again, simply look at the dealership ads in your local paper for weekly evidence.

By making the Compass approximately 8 inches longer (wheelbase approximately 2.5 inches longer) than the Renegade, it yields far more luggage space as well as more legroom for the rear seat passengers. It basically starts to approach the size of the best-selling small SUVs in the U.S. market right now: Honda (NYSE:HMC) CR-V, Toyota (NYSE:TM) RAV4, Nissan (OTCPK:NSANY) Rogue, Ford (NYSE:F) Escape, Chevrolet Equinox, Hyundai (OTCPK:HYMLF) Tucson, Kia Sportage, Mazda (OTCPK:MZDAY) CX-5 and so on. These are cars that sell mostly in the 150,000 to 350,000 unit per year range, in the U.S. alone. The baseline for Jeep is 215,987 from its own 2016 combined number, as shown in the table above.

The all-new Compass has the advantage of offering interior space that to me seemed to be at least as large as the larger Cherokee model, but being $2,600 cheaper than the Cherokee in terms of the starting price. That's over 10%. The all-new Compass starts at $21,990 before discounts.

The Cherokee gives you the option of a V6 engine and doubling the towing rating from 2,000 lbs to 4,000 lbs. If you don't need any of those, then the all-new Compass seems to be the much wiser choice.

Step #5: Industrialize internationally even more, with Mexico and India

When Jeep broadens the new global platform from the Renegade to the all-new Compass, it adds two new manufacturing sites for this new Jeep platform. First, Mexico, where production just started. This factory also has been making the Dodge Journey and Fiat 500.

This Mexican factory will support most of the Americas and Europe (Brazil being one major exception) for the production of the all-new Compass. The other new site for this Jeep platform will be in India, which comes online around the middle of 2017. It will be making right-hand-drive versions of the car for those places around the world where people drive on the wrong side of the street.

In addition, the all-new Compass will be made in the same factories in Brazil and China where the Renegade started production in 2015. Being on the same platform with largely the same engines, makes the assembly line extremely simple to adapt. The Compass is "just" 8 inches longer and with a 2.5 inch longer wheelbase, than the Renegade.

Step #6: Make an even smaller version of the Renegade?

In the U.S. market, we view the Jeep Renegade as being one of smallest SUVs. Well, it's really not, certainly not viewed through a global lens, and not even in the U.S. crossover market anymore. From Nissan Juke to Mazda CX-3 and Honda HR-V and soon the Ford EcoSport, the SUV market is adding models that are smaller and smaller.

For whatever reason, there is a huge demand for SUVs that are even easier to park than the smallest SUVs in the market in recent years. People like the ride height and the macho look, but they just don't need all that much space for rear seat passengers and luggage space - unless you fold the rear seat.

For this reason, it would be logical to expect that Jeep expand its brand to a model that's even smaller than the Renegade. Perhaps, it won't even be sold in the U.S. or Canada. Then again, one of the reasons Buick has become the third-fastest growing premium brand is that the Encore model became a hit. The Encore is a premium tiny SUV, arguably at least as small as the Jeep Renegade. So why not dig one level deeper, considering that the ground is so soft in the tiny SUV segment?

Step #7: Go big. Bring back the (Grand) Wagoneer

You can option the Grand Cherokee over $67,000 before discounts, but the Grand Cherokee simply can't compete with the most premium SUVs. First, it doesn't have three rows of seating, and secondly it's just not as large or luxurious in general. Once you get your $10,000 discount off a Grand Cherokee, I would not be surprised to hear that the average selling price of a Grand Cherokee is well below the U.S. average for a new car (approx $34,000).

Jeep has confirmed that it will bring back some combination of the Wagoneer and Grand Wagoneer: here.

That kind of larger SUV would have three rows of seats and compete with all the larger and more expensive SUVs from GM (Cadillac Escalade, GMC Yukon, Chevrolet Tahoe and Suburban), Ford (Expedition), Lincoln (Navigator), Mercedes (GLS), BMW (the upcoming X7), Audi (Q7), Volvo (XC90), Land Rover (Discovery), Nissan (Armada), Infiniti (XC80), Toyota (Sequoia and Land Cruiser), Lexus (LX570), Mazda (CX-9), Volkswagen (Atlas) and various products from Kia, Hyundai and Acura. This price range could span from $40,000 to $90,000.

For example, a top-of-the-line Cadillac Escalade could have a variable unit profit of up to $30,000: here, Considering that the average Jeep Grand Cherokee can have a real-world transaction price of not too far from $30,000, that's a profit pool for which FCA is surely salivating. These kinds of hugely profitable large three-row luxury SUVs could help FCA profitability dramatically. It sure beats losing $14,000 for every electric car FCA sells: here.

Step #8: A Jeep pickup truck

Jeep? Pickup truck? Why not both? Can you spell "hot?" Well, it's coming. No, it won't be in dealerships before the end of 2017, but Jeep has confirmed that it's coming. Late 2018 seems reasonable based on what I hear, but that's only an educated estimate.

This Jeep pickup truck would be based on the next-generation Wrangler - the "original" Jeep which establishes the brand's iconic image. How this kind of obvious product took so long to make it to market is beyond me. Can you imagine how well a Jeep pickup truck would have been selling in the recent years already? Jeep has left a lot of money on the table here.

Conclusion: Using Tesla as metric, Jeep should be worth $120 billion

Looking crudely at Google Finance, it says that FCAU has a market cap of $16.5 billion. Jeep is one subset of that number. But consider this: By all accounts, this valuation is insane. Insanely low, that is.

At least in comparison to Tesla, that is.

Tesla is growing at around 50% per year, while posting enormous losses, and just barely exceeded 76,000 cars in a year. The only very specific guidance it has given is for a run-rate no higher than 100,000 cars per year (It guided for 47,000 to 50,000 cars for the first half of 2017, which is flat over the second half of 2016).

Jeep sold over 1.4 million cars in 2016, and is by all accounts more profitable than FCA's overall average. As I have shown above, Jeep is on a path to vastly increase sales over the next few years, perhaps reaching 3 million cars sold per year within a decade.

It's already almost 20x larger than Tesla on a unit sales basis, and with infinitely superior profitability. Yes, Tesla is hoping to grow to 500,000 cars per year in 2018 and 1 million units in 2020, but almost nobody comes close to believing those numbers, even if everyone recognizes that Tesla will show healthy unit growth rates - with or without profitability.

But even if you give Tesla the benefit of the doubt, it won't be remotely near Jeep even by 2020. Jeep should easily reach 2 million units by 2020, and if you consider the gap in profitability, Jeep being on the way to reach 3 million units soon enough after 2020 should mean Jeep is worth at least 3x Tesla. That would be 3x $43 billion or $126 billion. FCA has around $6 billion in net industrial debt.

Either of the following must be true: Either Jeep is worth $120 billion, or Tesla is overvalued today. I think you can figure out what is more likely.

Disclosure: I am/we are short TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article for publication, the author was long F and GM, and short TSLA. However, positions can change at any time. The author regularly attends new vehicle launches, press conferences and equivalent hosted by most major automakers. Jeep hosted a product launch event.

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